Canadian National Railway (NYSE:CNI) is getting a boost from its nationality lately, with the U.S. dollar's strength -- and the fact that more than 30% of the company's deliveries are into the U.S. -- helping boost profits in the first quarter. The company also got a lift from a much less severe early winter this year, versus 2014's "polar vortex" that led to record cold and snowfall in Western Canada slowing its trains down, and leading to smaller loads.
Let's take a closer look at the results, and see what we might can expect going forward.
Gained in translation
While the big story for many U.S.-based multinationals has been the negative impact of a strong U.S. dollar, Canadian National got a nice lift from the exchange rate this quarter. As a matter of fact, the boost was a pretty big deal last quarter, as the company gained about C$56 million (that's Canadian dollars) in extra profits. That's nearly 9% in extra per-share profits for the company.
That's great, but it's important to remember that this isn't a sustainable long-term source of extra profits, and frankly it can bite the company at times, too. For now, just take it as a nice positive while it lasts. but nothing more than that.
After last year's brutal weather, the company was expected to report higher operational metrics, and it didn't disappoint. Carloadings -- which measures weight shipped per car load -- increased 9% in the quarter, while average train velocity increased almost one mile per-hour, and terminal dwell time -- how long cars sit around waiting to move -- fell almost 15%.
These improvements were part of what drove the company's operating ratio down to 65.7% for the quarter, a major improvement from the year-ago quarter's 69.6%. Remember -- a lower ratio here is better.
From a constant-currency measure -- which removes the benefit of the strong USD -- Canadian National continues to benefit from the strenght of Canadian natural resources including agriculture, with metals & minerals, forest products, and grain & fertilizers all up more than 10% last quarter.
Energy shipments derailing growth?
However, an evolving energy market is a bit of a mixed bag for the company, with coal shipment revenue declining 19% last quarter. Chances are, coal shipments will continue to show some decline, as natural gas and alternatives take market share from coal as a fuel for electricity production.
Petroleum & chemicals only increased 5% in constant-currency terms, as weak global demand growth has severely affected oil prices. This is especially notable for CN because many of its Canadian oil shipments come from Canadian tar sands, which is some of the world's most expensive oil to produce. North American oil rig counts have plummeted since December, with about half as many oil rigs operating today as producer cut costs. Eventually this should lead to better global supply and demand balance and prices should rise.
Until that happens, CN could see its crude shipping business weaken, and unfortunately there's no accurate or dependable way to measure when oil prices could bounce back and new production in N. America bounce back. Frankly, this could impact Canadian National more as we get further into 2015. The company acknowledged this in its release:
CN also assumes its 2015 customer shipments of energy-related commodities, namely crude oil and frac sand, will grow by approximately 40,000 carloads versus 2014, compared with its previous assumption announced on Jan. 27, 2015, of 75,000-carload growth for the two commodities in 2015 versus 2014.
In other words, management cut its growth forecast for oil and oil-related shipments in half for 2015. However, as can be seen with the strong growth in its other segments, CN doesn't rely too heavily on any one kind of product, so the potential weakness in both coal and crude aren't likely to cause any serious material problems for the company.
The boost from a strong U.S. dollar is nice, and it's probably going to help most of 2015. But again, it's not a long-term benefit, and it's only partly a benefit since a very large part of the company's business expense is also in U.S. dollars, since close to one-third of the company's operations are based in the U.S.
With that said, the company has done a remarkable job of keeping its costs relatively low, while utilizing the strength of its geographical footprint to ship natural resources and intermodal containers. Between the temporary currency benefits and the improved utilization figures, management reaffirmed its guidance of double-digit earnings per-share growth in 2015, even with the projected weakness in energy and some uncertainty around economic drivers within Canada.
Furthermore, the company increased its dividend by 25% earlier this year, and only pays out about 25% of earnings in dividends currently. Management is committed to raise that payout ratio closer to 35% of earnings, an indication that future increases are almost certain. The 1.5% yield isn't what income-seekers may be looking for today, but if you're not counting on the dividend for income yet, the record of growth is probably more important than the yield today.
In closing, CN continues to be one of the best-run railroads in North America, and that shows in yet another solid earnings report.